Andrew Bailey, BoE’s Andrew Bailey, casts doubts on the need for future interest rate increases

Andrew Bailey said the UK would avoid any further interest rate increases on Wednesday. The pound fell to its lowest level in three months against the US dollar, as currency traders reduced their bets that UK borrowing costs would rise.

The sterling fell 0.45 percent on the day, to $1.2507, after Bank of England Governor told MPs that UK Interest rateswere “much closer” than before their peak. He stressed that the central bank is still considering its options.

“I remember a time when it seemed to me that the rates were going to need to go up. . . Bailey explained that the question was “how much, and in what time frame?”.

I think that we are now much closer to the end of [the interest rate] cycle.

The Monetary Policy Committee of the BoE will vote on 21 September whether to raise rates from their current 5,25 per cent following 14 consecutive increases — a decision that Bailey said, “The judgements are now much finer (than before).”

The nine-member committee is in a delicate position after Bailey’s comments and two other MPC member’s similar signals about pausing rate increases.

Swati Dhingra, a member of the MPC, has already voted against rate increases.

Cathal Kennedy is a senior UK economist with RBC Capital Markets.

The result will have a big impact on mortgage holders, savings and government borrowing costs at a time when the country still struggles with a cost-of-living crisis and Rishi’s Sunak government is trying to catch up ahead of an upcoming election.

The European Central Bank also struggles with whether or not to declare a break in the tightening of monetary policy this month, despite the fact that it is expected that US Federal Reserve will not raise its benchmark rate for now.

Bailey warned that he would not be providing any guidance prior to the MPC meeting.

Trading on the swaps market, however, indicated that after his comments the probability of an interest rate hike on September 21 was down from 96% to 88%. Markets still expect two additional increases in interest rate, which will peak at 5.75 percent before declining gradually in 2024.

MPC officials say the September meeting will also have to decide whether rates are kept at their current level for longer, or if they are raised higher but for a shorter time.

Huw Pill (the BoE’s Chief Economist) said last week that, rather than raise interest rates, he would prefer to maintain them at the current 15-year high.

Sir Jon Cunliffe has indicated that he may also consider a pause on interest rate increases.

Cunliffe stated on Wednesday that “we are clearly reaching a point where headline inflation is coming down, and we are beginning to see some movement on the labour market – a cooling.”

MPC will likely decide when it receives the data from the labour market next week, and the inflation data the day before. Bailey acknowledged that wage increases have been higher than anticipated by the committee but said this could soon change.

“The question is now as headline inflation falls. . . Will we continue to see a decline in inflation expectations? . . . “Will that reflect in wage negotiations?” asked he.

Bailey said that he expects inflation to return “somewhere around the end of the next year” to the BoE target of 2 percent. He said that lowering the rate “more rapidly” would not be the “best option”, due to the negative impact on the economy.